Obama’s $300 Billion Economic Plan: What’s The Likely Impact?

Reports are now suggesting that President Obama will propose a $300 billion effort to jump-start the economy when he delivers a policy address before both houses of Congress tomorrow night. As we wrote yesterday, the package will likely include a mix of payroll tax cuts–an extension of the one now in place for employees, and a new one for employers–and spending on infrastructure projects, extended jobless benefits and aid to state and local governments.But how much impact is a package of that size and makeup likely to have? And amid sky-high joblessness and the real threat of a double-dip recession, will Obama’s proposal be up to the challenge?

Economists are doubtful.

“Three hundred billion dollars is better than nothing,” Gus Faucher, the managing director for macroeconomics at Moody’s Analytics, told The Lookout. “Would it be better if we had a bigger package? Yes.”

That’s not to say it won’t have an effect. “If passed as proposed, it would have a significant impact on the economy,” Paul Ashworth, chief US economist for Capital Economics, told The Lookout. But he agreed with Faucher that it wouldn’t be enough to pull the economy out of the dumps for a sustained period. “It’s just simply not big enough,” he said.

Three hundred billion dollars represents about two percentage points of GDP, Ashworth said. So if the full Obama plan went into effect in the next year, it would bump economic forecasts for 2012 up from around 2 percent, where most are currently, to around 4 percent. Or, if spread out over a longer time period, it would add around half a percentage point to growth for each of the next four years.

What would that mean for jobs? Based on what’s known as “Okun’s Law,” economists say that a two percentage point rise in GDP translates to a decrease in unemployment of about 1 percentage point. So a $300 billion boost in spending might bring unemployment down from the current rate of 9.1 percent to somewhere around 8.1 percent.

But Ashworth warned that even that jolt likely wouldn’t be enough to pull the United States back into a sustained “virtuous circle” of growth, given the economy’s ongoing structural problems. He cited the twin drags of high household debt–a result of the housing boom and bust–and low business confidence.

Mark Thoma, an economics professor at the University of Oregon, agreed.

“If this is just a one-year plan, it will have an impact on employment during the first year, and there may be some residual going forward, but it will mostly die out after it ends,” Thoma told The Lookout via email. “We need a sustained, year-after-year stimulus, one that remains until employment is doing better.” Thoma did add, however, that a one-time shot is “better than nothing.”

To give a sense of context, a $300 billion proposal would represent less than one-tenth of the $4 trillion infrastructure spending package over the next 10 years that some on the left have pushed for.

And of course, it’s unlikely that the full $300 billion package will pass. Thanks in part to the reluctance of GOP congressional leaders to green-light more spending, Republican lawmakers will be deeply wary of signing off on everything Obama asks for–even though the White House has said it plans to fund the additional spending with offsetting deficit reduction measures.

And that brings up another issue. Deficit-reduction measures could cancel out the impact of the package if they come too early–and we’re not likely to know the timing of such cuts for a while. “If it’s paid when the economy is doing better, i.e. in the future, no problem in terms of changing the calculations of what will happen now,” Thoma said. “But if it’s paid now, the increased taxes will offset the effects of the stimulus.”

Yet another problem, Ashworth said, is that spending on infrastructure projects isn’t an effective short-term way to boost growth. “There just aren’t enough shovel-ready projects,” he said, noting that the 2009 stimulus addressed many of those that had previously existed.

So in practical terms, whatever infrastructure spending Congress ends up approving likely will have to spread out over the next five to 10 years, rather than having an immediate impact.

And finally, a portion of the package–extensions of the employee payroll tax cut and jobless benefits, both of which are scheduled to expire at the end of this year–aims merely to maintain the status quo so things don’t get worse, rather than representing any new stimulus.

As Ashworth put it: “It’s more about avoiding a fiscal tightening.”

Nigel Gault, chief U.S. economist for IHS Global Insight, described the package as an effort to buy time. “All it does, it gives more time for households to build up their savings and reduce their debt,” he told The Lookout. “It tries to fill in a huge hole in aggregate demand, and allow private sector to get on its own feet.”

Gault, too, said he’d like to see a bigger package, though he acknowledged that it can be difficult to launch an effective stimulus effort quickly.

In other words, if Obama were to get everything he asks for, we’d likely see a modest boost to the economy, but not as sustained an impact as the situation calls for. And it’s far more likely that the end product of tomorrow’s proposals will be ven less than that.

As Gault summed things up: “We’re gonna have a lot of unemployment in 2013 and 2014.”